00:00 Speaker A
Large and mega cap stocks dominating headlines and portfolios alike, but small caps lagging behind. Our next guest though, says small caps will have their day in the sun. We’re navigating how to play small caps with the Yahoo Finance playbook. Joining me now is Sandy Villere, portfolio manager at Villere and Company. Sandy, always good to see you. So you say here, Sandy, small caps, they’re gonna have their day in the sun, better days ahead. How come, Sandy? Walk us through it.
00:39 Sandy Villere
Yeah, and I I believe in reversion to the mean, and over the very long run, you take more risk in small cap and you should get more reward. But over the last 10 years, large caps outperformed by about 5% annually, uh, and even this year, you know, S&P’s up about six and and small’s only up about one. Um, I just think that from a valuation standpoint, the small caps are about a 23% discount to large cap. And when you look at the top 10 stocks in the S&P 500, they’re trading about 29.3 times, the other 490 stocks are trading about 20 times. So we think they will have their day in the sun, and, uh, another interesting thing is when you go back over last 100 years, and you look at the cape ratio, the cyclically adjusted PE on the S&P, uh, there’s only five times in history and we’re there now, where we’ve hit these levels. Um, one was in ’99 before the market cracked in 2000. Uh, you have to go forward to ’07 before it cracked in ’08, and then again in, uh, 2021, before we had that down, uh, 30% year in ’22, and then again, uh, at the end of ’24 when we did see, uh, about a 20% pullback, uh, into liberation day before we V-shaped from there. So we just think valuation is why small caps look so attractive.
02:30 Speaker A
So Amy, I want to get you in here, because so Sandy says, listen, small caps are gonna have their day in the sun, Amy. What do you see?
02:42 Amy
Yeah, I would say this is a key questions for investors we talk to because small caps, you know, for traders, it’s not necessarily just about fundamentals, it’s about how they bake into factors. So when you think about small caps, we use IWM as a proxy, but is this idea of when we’re going to get the rotation from, uh, growth into value, or from value, you know, from momentum, which had been outperforming? You’re starting to see signs of that, but two major indicators I’d look at, one is how much call volume demand you see in IWM, which again is that proxy for small caps, and two, if you see a sustained reversion in that rotation between small cap, with IWM as the proxy and Qs as the growth factor.
03:46 Speaker A
Sandy, what would happen, you know, there are some smart economists out there, smart strategists, I’ve heard them arguing, listen, they they don’t think the Fed cuts this year. Economy’s resilient, inflation’s sticky. What if J. Powell sits on his hands? Play that out for me. What would that mean for small caps?
04:09 Sandy Villere
Yeah, that’s going to be a tougher environment, and that’s what we’re in now. We’ve got the the dollar fall 11% year to date. Not good for small caps, and and interest rates have been stubbornly high. So we we need to see, you know, kind of some, probably the job market fall apart a little bit, um, and we need to see rates come down for for small caps to finally get the the wind in their back. Um, but again, uh, we just need a rotation in sentiment from large cap growth to value or small cap, and I I think that could also, uh, play out even if rates kind of stay stay, uh, flat.
05:02 Speaker A
Sandy, let’s get to some names here because I always like to get your picks. Uh, Caesars, let’s start there. Why is that one a buy? As you know, stock’s been left for dead, you say though, this is an opportunity.
05:20 Sandy Villere
Yeah, I mean, you’re down 36% off the high. You’re now trading at seven and a half times enterprise value to EBITDA. If you look at 2026 numbers, this is a 17% free cash flow yield. The stock is baking in a recession, and and it it is exposed to the consumer, which is not maybe a great spot to be, and they do have leverage. Every 100 basis points, uh, cut, uh, by the Fed would be about $60 million in free cash flow added to Caesars. So I just think it’s so cheap, uh, and and the worst is expected that, um, it’s a nice time to be picking it up when when everybody else hates it.
06:09 Speaker A
All right, from Caesars to a biotech. Walk me through this one, Ligand, that’s ticker LGND.
06:19 Sandy Villere
Yeah, Ligand is really a a chicken way to play the biotech industry. So they’ve got many, many shots on goal as opposed to a typical biotech investment that could be a real binary outcome. Uh, just on July 1st, to kind of give you an example, um, they just had, uh, helped, uh, put, um, uh, a merger together with, uh, Channel Therapeutics, um, and Pelthos Therapeutics, and, uh, they invested about $18 million out of $50 million. Um, this is a Molluscum drug that impacts about 16.7 million people, and now you can actually take it at home instead of having to go to the doctor’s office. They’re going to get a third 13% royalty on that, and then just one more, uh, Merck bought Verona this morning, as y’all know, for $10 billion. They also have, uh, a mid-single digit royalty on their COPD drug for, um, you know, progressive lung disease. So that’s just two examples with their 90 different programs and 13 different, uh, royalty, uh, commercial royalty, uh, streams right now. So we like that one a lot.
07:47 Speaker A
Finally, I just want to squeeze this one in, Sandy. Option Care, ticker OPCH, which has had a a nice bit of run here. I’m looking it’s up about 30% this year. You say there’s some some potential headwinds headwinds, but it’s a buy, Sandy.
08:07 Sandy Villere
Yeah, it is. I I think I could see this trading from about 13 times enterprise value to EBITDA to about 15 times. This is home therapy, um, uh, you know, uh, treatments, and so I think a lot of people like these home infusions, uh, it’s much cheaper, about 50% cheaper than doing in a hospital. It’s much more comfortable, uh, for the consumer, and I don’t think any of these things, as more and more people turn 65, uh, and older, um, I don’t think this is going away anytime soon. So we think it’s got a good, um, a good future.
